What is the difference between fixed and variable costs?

Fixed costs are usually the overheads of an organisation or department and are costs that will be incurred regardless of the level of activity. It does not mean that the actual amount in the budget is fixed; it means that the volume needed does not vary greatly, even though the price may vary. So, for example, you would need the same amount of heating in a building regardless of the number of projects being run from it.

Variable costs are closely related to a particular service or activity and so will vary in relation to the level of activity. For example, a project to provide tea and coffee will have the variable costs of the ingredients – the costs of buying these will vary in direct proportion to the number of cups of tea and coffee served. Alternatively, classifying costs as direct or indirect is another way of looking at them as to how they relate to the structure of the organisation and the “department” in which the cost arises.

  • Direct costs can be identified as the costs directly attributable to a particular project or department
  • Indirect costs are costs that relate to the organisation as a whole. Central administration costs are indirect costs to the organisation, since they cover all projects but generally do not relate specifically to any one

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Jonathan Orchard

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Arlene Clapham

Risk & Assurance Manager

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